[Federal Register Volume 61, Number 70 (Wednesday, April 10, 1996)]
[Notices]
[Pages 15975-15983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8841]



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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 96-23; Application Number D-09602]


Class Exemption for Plan Asset Transactions Determined by In-
House Asset Managers

Agency: Pension and Welfare Benefits Administration, Labor.

Action: Grant of class exemption.

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SUMMARY: This document contains a final exemption from certain 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (ERISA or the Act) and from certain taxes imposed 
by the Internal Revenue Code of 1986 (the Code). The exemption permits 
various transactions involving employee benefit plans whose assets are 
managed by in-house managers (INHAMS), provided that the conditions of 
the exemption are met. The

[[Page 15976]]
exemption affects participants and beneficiaries of employee benefit 
plans, the sponsoring employers of such plans, INHAMS, and other 
persons engaging in the described transactions.

EFFECTIVE DATE: The effective date of the exemption is April 10, 1996.

FOR FURTHER INFORMATION CONTACT: Lyssa Hall or Virginia J. Miller, 
Pension and Welfare Benefits Administration, Office of Exemption 
Determinations, U.S. Department of Labor, Washington, DC 20210, (202) 
219-8971 (not a toll-free number) or Paul D. Mannina, Plan Benefits 
Security Division, Office of the Solicitor, (202) 219-9141 (not a toll-
free number).

SUPPLEMENTARY INFORMATION: Exemptive relief for the transactions 
described herein was requested in an application dated December 16, 
1993 submitted by the Committee on Investment of Employee Benefit 
Assets (CIEBA), pursuant to section 408(a) of ERISA and section 
4975(c)(2) of the Code, and in accordance with the procedures set forth 
in 29 CFR section 2570 subpart B (55 FR 32836 August 10, 1990).
    On March 24, 1995, the Department published a notice in the Federal 
Register (60 FR 15597) of the pendency of a proposed class exemption 
from certain of the restrictions of sections 406 and 407(a) of ERISA 
and from certain taxes imposed by section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1) of the Code.1

    \1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978), effective December 31, 1978 (44 F.R. 1063, 
January 3, 1978), generally transferred the authority of the 
Secretary of the Treasury to issue exemptions under section 
4975(c)(2) of the Code to the Secretary of Labor. In the discussion 
of the exemption, references to sections 406 and 408 of the Act 
should be read to refer as well to the corresponding provisions of 
section 4975 of the Code.
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    The notice gave interested persons an opportunity to submit written 
comments or requests for a hearing on the proposed class exemption to 
the Department. The Department received fourteen written comments and 
no requests for a public hearing. Upon consideration of all of the 
comments received, the Department has determined to grant the proposed 
class exemption, subject to certain modifications. These modifications 
and the major comments are discussed below.

Discussion of the Comments

A. Basic Exemption

    1. INHAM as Decision Maker (Section I(a)). The proposed general 
exemption, set forth in Part I, permitted that portion of a plan that 
is managed by an INHAM to engage in all transactions described in 
section 406(a)(1)(A) through (D) with virtually all party in interest 
service providers except the INHAM or a person related to the INHAM. 
Under section I(a) of the proposed exemption, the INHAM must function 
as the decision maker for the plan in all covered transactions. 
Specifically, section I(a) requires that the terms of the transaction 
be negotiated by, or under the authority and general direction of, the 
INHAM and that the INHAM make the decision to enter into the 
transaction.
    Under section I(a) of the proposal, the exemption would be 
available for a transaction involving an amount in excess of $5,000,000 
notwithstanding the fact that the transaction that had been negotiated 
by the INHAM was subject to a veto or approval by the plan sponsor. A 
commenter suggested that section I(a) should be modified to permit the 
plan sponsor or its designee to retain the right to veto or approve any 
transaction, regardless of the size of the transaction. Although the 
exemption permits the retention of a veto power for large transactions, 
the exemption was developed based on the premise that independent 
decisionmaking was more likely to be assured if day to day transactions 
are negotiated and approved by an INHAM. Therefore, the Department has 
determined not to adopt the commenter's suggestion.
    A commenter is concerned that the requirement under section I(a) of 
the proposal that the INHAM negotiate and make the decision on behalf 
of the plan to enter into the transaction may foreclose a transaction 
where an INHAM retains a QPAM to locate and negotiate the terms of a 
possible plan investment. According to the commenter, it is frequently 
advantageous for a plan to retain a QPAM to identify investment 
opportunities and to negotiate the terms of these types of investments, 
while permitting the INHAM to perform its own ``due diligence'' review 
of each investment opportunity presented and evaluate the 
appropriateness of the investment for the plan's particular investment 
needs. The Department does not believe that it would be appropriate in 
the context of this exemption proceeding to modify the INHAM exemption 
to, in effect, permit a transaction that was previously rejected by the 
Department during its consideration of the final QPAM class 
exemption.2

     2 In this regard, see PTE 84-14, 49 FR 9497 (March 13, 1984).
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    A commenter questioned whether Part I of the exemption would apply 
to ``drag along'' and similar transactions that are not actually 
negotiated by the INHAM. According to the commenter, when a plan makes 
an investment in a non-publicly traded entity, both the plan and other 
investors want to be able to dispose of their investment at a favorable 
price. In order to accomplish this objective, plans and other investors 
may negotiate certain rights at the time they make their initial 
investments. One such right would be the ability of the plan to ``tag 
along'' and sell out its interest at the same price as the majority 
investors if the majority investors sell their interests to a third 
party. The converse of this right would be the ability of the majority 
investors to ``drag along'' the plan if they sell their interest to a 
third party. When these rights are exercised, it may turn out that the 
party to whom the interests are sold is a party in interest. The 
commenter argues that the ``drag along'' or similar transactions should 
be treated as subordinate to the initial investment transaction and, 
therefore, subject to the authority or general direction of the INHAM 
for purposes of section I(a) of the exemption. The commenter represents 
that, while the INHAM is not involved in selecting the party to whom 
the plan's interest is sold, the transaction is determined by an 
independent party pursuant to rights negotiated by the INHAM at arm's-
length at the outset of the investment transaction. The commenter 
further represents that these rights would be taken into account by the 
INHAM in determining whether the initial investment would be prudent. 
It is the view of the Department that section I(a) of the exemption 
will be deemed satisfied in the case of ``drag along'' or similar 
transactions that are entered into pursuant to rights that were 
negotiated by the INHAM as part of the primary investment transaction. 
The Department notes, however, that it does not interpret section I(a) 
as exempting a ``drag along'' or similar transaction unless such 
transaction is itself subject to relief under the exemption and the 
applicable conditions are otherwise met. In this regard, the Department 
expects that any determination regarding the appropriate price to be 
paid for the investment would reflect the effect on the value of such 
investment of rights which may be exercised in the future at the 
discretion of unrelated third persons.
    One commenter requested that the Department clarify that the 
requirements of section I(a) would be met if an officer of the INHAM 
also serves as a member of the employer's investment committee or other 
named fiduciary under the plan. Nothing contained in section I(a) would 
preclude

[[Page 15977]]
an officer of the INHAM from also serving as a member of the employer's 
investment committee or other named fiduciary under the plan, provided 
that the INHAM otherwise meets the definition set forth in section 
IV(a), including the requirement that the INHAM must be a separate 
entity that is registered as an investment adviser.
    A commenter requested that the Department clarify that the 
requirements of section I(a) will be satisfied notwithstanding the fact 
that the INHAM also manages assets of outside clients.
    In the Department's view, nothing contained in the exemption would 
preclude the INHAM from providing services to outside clients who have 
no affiliation with the INHAM.
    In response to a comment regarding typical investment increments 
used in financial transactions, the Department has revised section I(a) 
by replacing ``an amount in excess of $5,000,000'' to ``$5,000,000 or 
more'' in connection with the plan sponsor's right to veto or approve 
such transactions.
    2. Transactions Involving Arrangements Designed to Benefit Parties 
in Interest (Section I(c)). Section I(c) of the proposal requires that 
the transaction not be part of an agreement, arrangement or 
understanding designed to benefit a party in interest. A commenter 
suggested that the Department clarify that to the extent that the 
INHAM's purpose in entering into a transaction is not to benefit a 
party in interest, so that any benefit to the party in interest is 
incidental to the purpose of the transaction, the transaction should 
not give rise to an agreement, arrangement or understanding designed to 
benefit a party in interest which is described in section I(c). The 
Department concurs with the commenter and notes that the intent of the 
condition in section I(c) was not to deny direct benefits to other 
parties to a transaction but, rather, to exclude relief for 
transactions that are part of a broader overall agreement, arrangement 
or understanding designed to benefit parties in interest.
    3. Transactions with Service Providers (Section I(e)). Under 
section I(e) of the proposed exemption, relief was limited to 
transactions with party in interest service providers who do not have 
discretionary authority or control with respect to the assets involved 
in the transaction or otherwise render investment advice with respect 
to such assets. A commenter urged the Department to expand the scope of 
the final exemption to include relief for all parties in interest. The 
Department does not believe that a sufficient showing has been made 
that the safeguards contained in the proposed exemption would 
adequately discourage the exercise of undue influence upon the INHAM if 
the final exemption were expanded as requested by the commenter. 
Accordingly, the Department cannot conclude that further relief is 
warranted.
    Several commenters suggested that the Department clarify that 
section I(e) of the proposal would not preclude a directed trustee of a 
plan or a trustee with discretionary authority over plan assets not 
involved in the transaction from engaging in transactions with the 
plan. In the Department's view, a nondiscretionary trustee subject to 
the direction of an INHAM, and that does not otherwise render 
investment advice with respect to the plan assets involved in the 
transaction may carry out proper directions that are not contrary to 
ERISA with respect to the transactions covered by the class exemption. 
Similarly, the exemption would be available for transactions with a 
trustee that exercises investment discretion with respect to a portion 
of plan assets not involved in the transaction.
    Another commenter objected to the requirement in section I(e)(2) 
that the party in interest dealing with the plan not have discretionary 
authority or control with respect to the investment of the plan assets 
involved in the transaction and not render investment advice (within 
the meaning of 29 CFR 2510.3-21(c)) with respect to those assets. 
According to the commenter, the first part of this condition regarding 
discretionary authority or control is unnecessary in view of the 
requirement under section I(a) that the terms of the transaction must 
be negotiated by the INHAM, and that the INHAM make the decision on 
behalf of the plan to enter into the transaction. The commenter further 
believed that the requirement contained in section I(e)(2) that the 
party in interest dealing with the plan not render ``investment 
advice'' would create uncertainty and is unnecessary in view of the 
limited scope of relief provided. Accordingly, the commenter requests 
that the Department eliminate this requirement from the final 
exemption.
    This class exemption was developed, and is being granted by the 
Department, based on the essential premise that broad exemptive relief 
from the prohibitions of section 406(a) of ERISA can be afforded for 
all types of service provider transactions in which a plan engages only 
if the INHAM independently negotiates the transaction and makes the 
decision on behalf of the plan to enter into the transaction. The 
limitations contained in section I(e)(2) were included in the proposal 
in order to further emphasize that the INHAM must be the decision-maker 
in order for transactions to be covered by the class exemption. In 
addition, the Department believes that, if exemptive relief were to be 
provided where the party in interest renders investment advice to the 
plan, with respect to the transaction at issue, the potential for 
decision making with regard to the plan assets that would inure to the 
benefit of a party in interest would be increased. For these reasons, 
the Department believes that a separate condition is warranted and has 
determined not to revise the exemption as requested by the commenter.
    4. Fiduciary Audit (Section I(g)). Section I(g) of the proposed 
exemption required that an independent auditor conduct an annual 
fiduciary audit to determine whether the written procedures adopted by 
the INHAM are designed to assure compliance with the conditions of the 
exemption. Section IV(f) defined fiduciary audit as including: (1) a 
determination by the auditor as to whether or not the plan has 
developed adequate internal policies and procedures designed to assure 
compliance with the terms of the exemption; (2) a test of a 
representative sample of the plan's transactions to determine 
operational compliance with such policies and procedures; (3) a 
determination as to whether the INHAM meets the definition of INHAM set 
forth in the exemption; and (4) a written report describing the steps 
performed by the auditor during the course of its review and the 
auditor's findings and recommendations.
    Several commenters requested that the Department clarify the types 
of ``policies and procedures'' that the INHAM is required to adopt for 
purposes of sections I(g) and IV(f) of the proposal, and the criteria 
the independent auditor should apply in conducting the audit. Another 
commenter recommended that the audit be conducted in accordance with 
standards established by the American Institute of Certified Public 
Accountants (AICPA), and that the Department establish criteria against 
which the independent auditor can make a determination that the 
procedures are designed to operate in the manner contemplated by the 
exemption. In this regard, a commenter raised a related question 
concerning whether the proposed audit condition would require that the 
policies and procedures include substantive criteria regarding expected 
risk, gross return and expenses of a proposed transaction that the 
INHAM should consider. One commenter

[[Page 15978]]
suggested that the scope of the audit should be expanded to include a 
determination by the auditor regarding compliance with section 404(a) 
of ERISA. Lastly, a commenter urged the Department to delete this 
requirement entirely.
    As noted in the preamble to the proposed exemption, the Department 
proposed the audit requirement in order to address the lack of 
independence of the INHAM. The Department continues to believe that an 
annual fiduciary audit is necessary to address this lack of 
independence and, accordingly, has determined not to delete this 
requirement. In this regard, it was the Department's intent that the 
role of the auditor would be limited to determining whether the written 
procedures adopted by the INHAM are designed to assure compliance with 
the conditions of the exemption. Since the sole purpose of the audit 
requirement is to assure compliance with the exemption, the Department 
does not believe that it would be appropriate to expand the scope of 
this requirement to include either determinations under section 404 of 
the Act or determinations regarding the appropriateness of investments 
entered into under the exemption. In response to the comment concerning 
the adoption of AICPA standards as part of the audit requirement, the 
Department does not believe that it would be appropriate to adopt a 
definition that would require compliance with standards developed by 
certain professional organizations. However, in consideration of the 
concerns expressed by the commenters, the Department has adopted a new 
section I(g) which specifically requires that the INHAM adopt written 
policies and procedures designed to assure compliance with the 
conditions of the exemption. (The fiduciary audit requirement, set 
forth in section I(g) of the proposal, has been renumbered as section 
I(h) under the final exemption.) The Department has also adopted a new 
definition, under section IV(g), that contains a list of the objective 
requirements of the exemption that must be described in the written 
policies and procedures and that must be reviewed by the auditor.3 
In addition, the Department notes that, although the exemption provides 
flexibility with respect to the specific procedures adopted by the 
INHAM, it expects such procedures to be designed in a manner that 
assures that the INHAM's operations are consistent with the 
requirements of the exemption.

     3 Although the Department has limited the auditor's 
responsibilities under the final exemption to making findings on the 
INHAM's compliance with the objective requirements of the exemption, 
the INHAM remains responsible for assuring compliance with all of 
the conditions of the exemption. Accordingly, the failure of the 
INHAM to comply with a condition of the exemption not described in 
section IV(g) would render the exemption unavailable.
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    On a related issue, another commenter noted that the role of the 
auditor under the exemption should be limited to determining compliance 
with policies and procedures designed by the INHAM and should not 
include a determination by the auditor as to whether the plan has 
developed adequate policies and procedures as required under section 
IV(f) of the proposal. According to the commenter, having the auditor 
review the adequacy of the procedures would expand the auditor's role 
beyond the typical role of an independent auditor. In response to the 
commenter, the Department has determined to modify section IV(f) to 
delete the requirement that the auditor make a determination regarding 
the adequacy of the policies and procedures adopted by the INHAM. Under 
the revised section IV(f)(1), the auditor would be required to review 
the policies and procedures for consistency with the objective 
requirements of the exemption. In light of the decision to revise 
section (IV)(f)(1), the Department has also determined to expand 
section IV(f)(2) to require the auditor to test for compliance with 
both the written policies and procedures adopted by the INHAM and the 
objective requirements of the exemption. In the Department's view, this 
revised condition will help to assure that the INHAM properly carries 
out its responsibilities under the exemption.
    A commenter noted that the proposal did not make clear the 
consequences on existing transactions of an unsatisfactory audit. In 
response to the comment, the Department notes that an adverse finding 
in the auditor's report would not, in itself, render the exemption 
unavailable for any transaction engaged in by the INHAM on behalf of 
the plan.4 However, if a transaction did not meet a condition of 
the exemption (e.g., because relief was not available for transactions 
with the party with whom the INHAM dealt), the exemption would not be 
available for that transaction, but the exemption would continue to be 
available for those transactions that did satisfy its conditions. 
Conversely, a failure to comply with the general terms of the exemption 
applicable to all transactions would render the exemption unavailable, 
regardless of whether the failure is identified in the audit. Thus, if 
the INHAM failed to adopt policies and procedures that complied with 
the requirements of section I(g) or if no audit were conducted, the 
exemption would not cover transactions engaged in on behalf of the plan 
by the INHAM.

     4 The Department cautions that the failure of the INHAM to 
take appropriate steps to address any adverse findings in an 
unsatisfactory audit would raise issues under ERISA's fiduciary 
responsibility provisions.
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    Several commenters were concerned that the exemption could be 
interpreted to mean that only financial accounting firms or auditing 
firms could conduct the fiduciary audit required under section I(g) of 
the proposal. According to the commenters, other types of financial 
service organizations may well be capable of conducting a fiduciary 
audit. The Department did not intend to limit eligibility to serve as 
independent auditors under the exemption solely to accounting or 
auditing firms. Accordingly, any person who otherwise possesses the 
requisite technical training and proficiency with ERISA's fiduciary 
responsibility provisions may conduct a fiduciary audit.
    A number of commenters also requested that we clarify the 
requirement that the person performing the fiduciary audit must be 
``independent''. In the Department's view, whether an auditor is 
independent for purposes of the exemption would depend on the 
particular facts and circumstances of each case. However, the 
Department would not view an auditor as independent under circumstances 
where the auditor has a financial interest, including an ownership 
interest, in the INHAM , the employer, any parties dealing with the 
plan under the exemption, or any affiliates thereof, or otherwise 
receives more than a de minimis amount of its compensation from the 
INHAM, the employer, its affiliates, or the plan.
    One commenter questioned whether the auditor performing the 
fiduciary audit can be an entity or individual who provides other 
services to the plan, e.g., the firm that audits the plan in connection 
with preparation of the plan's annual report (Form 5500). In the 
Department's view, the provision of other services would not, in 
itself, preclude a firm from meeting the requirement under the 
exemption that the person performing the fiduciary audit must be 
independent. However, the Department notes that the provision of other 
services could raise questions regarding the independence of the 
auditor if the aggregate services result in the auditor deriving more 
than a de minimis amount of its compensation from the INHAM, the 
employer, its affiliates, or the plan.

[[Page 15979]]

    One of the commenters expressed concern about how the audit 
requirement would apply to the condition, contained in section I(b), 
that the transaction not be described in certain specified class 
exemptions. The commenter suggested that the auditor's role regarding 
this condition should be limited to a finding as to whether the 
transaction is of the type described in the specified class exemptions, 
rather than a finding regarding compliance with the terms and 
conditions of such class exemptions. The Department concurs with this 
comment. The Department believes, however, that it is the ongoing 
responsibility of the INHAM to determine whether a transaction is 
covered by one of the specified class exemptions or the INHAM 
exemption.
    A commenter suggested that the Department revise the requirement 
under section I(g) of the proposal that the independent auditor must 
have appropriate technical training and proficiency with ERISA's 
fiduciary responsibility provisions. According to the commenter, the 
most likely candidates to conduct an audit are people who have 
experience with ERISA's fiduciary responsibility provisions rather than 
technical training. On the basis of this comment, the Department has 
determined to modify section I(g) to provide that the independent 
auditor must have appropriate technical training or experience, and 
proficiency with ERISA's fiduciary responsibility provisions. Another 
commenter urged the Department to delete this requirement entirely. In 
response to this comment, the Department believes that the requirement 
that the auditor be familiar with ERISA's fiduciary responsibility 
provisions provides an additional protection under the class exemption. 
Therefore, the Department has determined not to further revise this 
condition.
    According to a commenter, the language in section IV(f)(4) of the 
proposal, which provides that the auditor must make recommendations in 
its written report, would require the auditor to go beyond its auditing 
role of providing findings regarding compliance. The Department concurs 
with this comment and, accordingly, has deleted the words ``and 
recommendations'' from section IV(f). In response to a related comment, 
the Department has deleted the words ``among other things'' from the 
definition of fiduciary audit in order to clarify that the definition 
sets out the specific steps for a fiduciary audit. The Department 
cautions that the auditor would be responsible for taking any actions 
necessary to adequately perform the steps described in the definition 
of fiduciary audit.
    A commenter suggested that the Department modify sections I(g) and 
IV(f) by deleting the word ``fiduciary'' from ``fiduciary audit'' 
wherever it appears in those sections and substituting the word 
``exemption'' to reflect the fact that the auditor's role is to assure 
compliance with the policies and procedures established for purposes of 
the exemption and does not otherwise involve examining for compliance 
with ERISA's fiduciary responsibility provisions. The Department 
concurs with the commenter's suggestion and has modified the exemption 
accordingly.
    The following examples illustrate the types of transactions which 
would be covered by Part I of the exemption:
    (1) Corporation C designates INHAM X to manage a portion of Plan 
P's assets. Assume that X meets the criteria for an INHAM under the 
exemption. X uses Plan P assets to purchase a building from Y, a 
wholly-owned subsidiary of a broker-dealer that provides services to 
the Plan. Absent this exemption, the purchase of the building from Y, a 
party in interest described in ERISA section 3(14)(G), would violate 
the restrictions contained in section 406(a)(1)(A), and the transaction 
could not proceed until exempted by the Department. The general 
exemption set forth in Part I would allow such transaction if the 
conditions contained therein are met.
    (2) INHAM X invests part of a pension fund's assets to acquire a 
parcel of unimproved real property from the president of the employer 
sponsoring the Plan. Part I does not provide an exemption for the 
purchase of the property since relief is limited under that Part to 
transactions with service providers and their affiliates. In addition, 
no relief would be provided under the exemption for the act of self-
dealing described in section 406(b)(1) arising in connection with X's 
use of the fund's assets in a transaction that benefits a person in 
whom X has an interest that may affect the exercise of its best 
judgement as a fiduciary.
    (3) Corporation C is the named fiduciary of Plan P. C chooses INHAM 
X to manage the portion of P's assets allocated for real estate 
investments. X, using its discretionary authority, locates and 
negotiates the purchase for $6 million of a commercial building in New 
York that is being offered for sale by Corporation Z. Z provides 
accounting services to Plan P. Pursuant to its arrangement with C, X is 
required to seek the approval of C for all real estate transactions 
involving amounts of $5 million or more. On the basis of X's 
recommendation, C approves the transaction. Despite the retention of 
approval power by C, Part I of the exemption would be available for the 
purchase of the building provided there is no arrangement with C that 
requires X to buy the building from Z and the conditions of Part I are 
otherwise met.
    (4) Corporation C allocates part of the assets of its Plan P to a 
master trust managed by INHAM X. X uses master trust assets to purchase 
an office building that is subsequently leased to M. M provides 
administrative services to Plan P. During the term of the lease, M 
becomes a wholly-owned subsidiary of Corporation C. Although M is no 
longer a party in interest with respect to Plan P solely by reason of 
providing services to such Plan, Part I will continue to be available 
for the entire lease term since, at the time the transaction was 
entered into (as defined in section IV(e)), M was not affiliated with 
the plan sponsor and its relationship to Plan P was solely that of a 
service provider.
    (5) INHAM X retains Broker-Dealer B to provide brokerage services 
to Plan P. In a separate transaction, X uses Plan P assets to purchase 
corporate bonds directly from B. The bonds were originally issued by 
Corporation Z, an investment manager for a portion of the Plan's assets 
that are not controlled by INHAM X. Since the Department expects that, 
as part of its fiduciary responsibilities, the INHAM would have 
analyzed the terms of the bonds prior to purchase, the relief provided 
by Part I could extend to both the acquisition of the bonds and the 
underlying extension of credit. Thus, Part I could cover a subsidiary 
transaction with a party in interest if such transaction is itself 
subject to relief under the exemption and the applicable conditions are 
otherwise met.
    (6) Corporation C designates INHAM X to manage a portion of Plan 
P's assets. X uses plan assets to purchase an office building that is 
subsequently leased to Broker-Dealer BD, a non-party in interest with 
respect to Plan P. During the term of the lease, BD becomes a service 
provider to Plan P. Although BD was not a party in interest service 
provider at the time the lease was executed, section IV(e) provides 
that Part I of the exemption would be available for the entire lease 
term provided that the remaining conditions of the exemption were met 
at the time the transaction was entered into. Alternatively, section 
IV(e) provides that Part I of the exemption would be available to 
exempt the transaction if

[[Page 15980]]
the conditions of the exemption were met as of the time the transaction 
would have become prohibited.

B. Specific Exemptions for Employers

    A commenter urged the Department to expand the relief provided 
under Part II of the proposal to permit an INHAM to select an affiliate 
to provide telecommunications related goods and services to any real 
property that may be considered an asset of the plan or to an entity in 
which the plan owns a controlling interest and that is managed by an 
INHAM. While the commenter has identified the need for exemptive 
relief, the Department does not believe that it has sufficient 
information on the record at this time to provide additional relief for 
a class of transactions that would otherwise violate section 406(b) of 
ERISA. Finally, the Department believes that adoption of the 
commenter's suggestion would arbitrarily favor one specific industry 
over another under similar circumstances.

C. Definitions

    1. INHAM (Section IV(a)). A commenter requested that the definition 
of an INHAM be revised to include a division or group within the 
employer's management structure. The Department believes that an INHAM 
that is organized as a separate legal entity, is separately managed, 
and is subject to oversight by the Securities and Exchange Commission 
as a result of registration as an investment adviser under the 
Investment Advisers Act of 1940 provides an important safeguard under 
the exemption. Therefore, the Department cannot conclude that further 
relief is warranted.
    Another commenter suggested that the Department modify the 
definition of INHAM to permit a majority-owned subsidiary of an 
employer, or a direct or indirect majority-owned subsidiary of a parent 
organization of such an employer to serve as an INHAM. The Department 
does not believe that a sufficient showing has been made that the 
requirement that the INHAM be wholly-owned under the proposal would 
raise compliance problems for those persons intending to use the 
exemption. Accordingly, the Department has determined not to revise the 
final exemption as requested.
    Several commenters urged the Department to expand the definition of 
an INHAM to include an entity established by a multiemployer plan or 
its plan sponsor. A commenter further noted that the definition of an 
affiliate of the INHAM contained in sections IV(a) and IV(b) of the 
proposal should be broadened to include families of multiemployer 
plans. The Department notes that the exemption application requested 
relief for transactions involving the assets of single employer plans 
managed by in-house managers. Accordingly, the Department does not 
believe that it has sufficient information regarding the operation and 
management of multiemployer plans to make the findings necessary to 
grant exemptive relief. Moreover, the Department does not believe that 
a sufficient showing has been made by the commenters that the 
conditions contained in the exemption would adequately protect the 
interests of participants and beneficiaries of internally managed 
multiemployer plans. Of course, the Department would be prepared to 
consider additional relief upon proper demonstration that the findings 
can be made under section 408(a) of ERISA with respect to such plans.
    A commenter requested that the Department clarify that the relief 
provided for employee benefit plans whose assets are managed by INHAMs 
extends, not only to plans sponsored by affiliates of the INHAM, but 
also includes plans sponsored by the INHAM itself. According to the 
commenter, the INHAM may establish a stand-alone plan to cover its 
employees, or its employees may participate in a plan established and 
maintained by an affiliate of the INHAM. Therefore, the commenter urged 
that the Department adopt a definition of ``plan'', which would include 
plans maintained by the INHAM or an affiliate of the INHAM. In 
consideration of the concerns raised by the commenter, the Department 
has determined to adopt a definition of plan under section IV(h) that 
includes plans maintained by the INHAM and affiliates of the INHAM. The 
commenter further requested that the requirements under section IV(a) 
that the INHAM have $50 million of plan assets under management and 
control, and that plans maintained by affiliates of the INHAM have $250 
million of aggregate plan assets also should be modified to clarify 
that these requirements are not intended to exclude any plan maintained 
by the INHAM. The requirement that the INHAM be affiliated with a plan 
sponsor (or group of related plan sponsors) whose plan(s) hold in the 
aggregate assets of at least $250 million, $50 million of which is 
under the direct management and control of the INHAM was imposed 
because the Department believes that INHAMs of large plans are more 
likely to have an appropriate level of expertise in financial and 
business matters. In this regard, the Department believes that the 
requirement that the INHAM have a significant dollar amount of assets 
under its management and control attributable to plans maintained by 
affiliates which are separately accountable for the operation of their 
respective plans provides an additional safeguard under the exemption. 
Accordingly, the Department has determined not to revise the $50 
million requirement. However, the Department has determined that it 
would be appropriate to include the assets of plans maintained by the 
INHAM in determining compliance with the $250 million standard.
    Finally, a commenter requested that the $50 million requirement be 
revised to permit the $50 million threshold to be met during the 
INHAM's first fiscal year as a separate legal entity. According to the 
commenter, the requirement that the INHAM have in excess of $50 million 
of plan assets under its management and control as of the last day of 
its most recent fiscal year could unintentionally prevent the exemption 
from being immediately available for an employer's in-house management 
group in its first year as a separate wholly-owned subsidiary of the 
employer. In response to this comment, the Department has revised 
section IV(a)(2) to specify that an existing asset management group 
that is newly-incorporated as a separate subsidiary of the employer may 
satisfy the $50 million requirement in its initial fiscal year if the 
requirement is met as of the date during its initial fiscal year as a 
separate legal entity that responsibility for the management of such 
assets in excess of $50 million was transferred to it from the 
employer.
    2. Continuing Transactions (Section IV(e)). A commenter asserted 
that the last sentence of section IV(e), which deals with transactions 
which are continuing in nature, is unclear. This sentence addresses the 
issue of whether a continuing transaction that is not prohibited and, 
therefore, not subject to the exemption at the outset, may become 
covered by the exemption during the course of the transaction if it 
later becomes prohibited. According to the commenter, certain of the 
conditions of the exemption can be met only at the time the transaction 
is entered into, such as the condition in section I(d) dealing with 
arms-length terms. Conversely, the requirements of section I(e)(1) 
dealing with the party in interest relationships permitted under the 
exemption can only be determined at the time the transaction would have 
become prohibited. It is the view of the

[[Page 15981]]
Department that section I(d) will be deemed satisfied in the case of a 
continuing transaction that later becomes prohibited if the transaction 
negotiated by the INHAM satisfied such section at the time the 
transaction was entered into. The Department notes that it does not 
interpret section IV(e) as exempting a continuing transaction that 
becomes prohibited subsequent to a renewal or modification that 
required the consent of the INHAM, unless the renewal or modification 
otherwise met the arm's-length requirement of section I(d). Lastly, the 
Department has modified section IV(e) to clarify that in determining 
compliance with the conditions of the exemption at the time that the 
transaction was entered into, section I(e) will be deemed satisfied if 
the transaction was entered into between a plan and a person who was 
not then a party in interest.

D. Miscellaneous

    1. In response to a comment, the Department has added section 
IV(d)(3) to the exemption in order to define ``control'' for purposes 
of determining whether or not an INHAM is ``related'' to a party in 
interest under section IV(d).

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his duties respecting the plan solely in the interests of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, and based upon the entire record, the 
Department finds that the exemption is administratively feasible, in 
the interests of plans and of their participants and beneficiaries and 
protective of the rights of participants and beneficiaries;
    (3) The exemption is supplemental to, and not in derogation of, any 
other provisions of the Act and the Code, including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (4) The exemption is applicable to a particular transaction only if 
the transaction satisfies the conditions specified in the class 
exemption.

Exemption

    Accordingly, the following exemption is granted under the authority 
of section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR part 2570, subpart B 
(55 FR 32836, August 10, 1990).

Part I--Basic Exemption

    Effective April 10, 1996, the restrictions of section 406(a)(1) (A) 
through (D) of the Act and the taxes imposed by Code section 4975 (a) 
and (b) of the Code, by reason of 4975(c)(1) (A) through (D), shall not 
apply to a transaction between a party in interest with respect to a 
plan (as defined in section IV(h)) and such plan, provided that an in-
house asset manager (INHAM) (as defined in section IV(a)) has 
discretionary authority or control with respect to the plan assets 
involved in the transaction and the following conditions are satisfied:
    (a) The terms of the transaction are negotiated on behalf of the 
plan by, or under the authority and general direction of, the INHAM, 
and either the INHAM, or (so long as the INHAM retains full fiduciary 
responsibility with respect to the transaction) a property manager 
acting in accordance with written guidelines established and 
administered by the INHAM, makes the decision on behalf of the plan to 
enter into the transaction. Notwithstanding the foregoing, a 
transaction involving an amount of $5,000,000 or more, which has been 
negotiated on behalf of the plan by the INHAM will not fail to meet the 
requirements of this section I(a) solely because the plan sponsor or 
its designee retains the right to veto or approve such transaction;
    (b) The transaction is not described in--
    (1) Prohibited Transaction Exemption 81-6 (46 FR 7527; January 23, 
1981) (relating to securities lending arrangements),
    (2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7, 
1983) (relating to acquisitions by plans of interests in mortgage 
pools), or
    (3) Prohibited Transaction Exemption 88-59 (53 FR 24811; June 30, 
1988) (relating to certain mortgage financing arrangements);
    (c) The transaction is not part of an agreement, arrangement or 
understanding designed to benefit a party in interest;
    (d) At the time the transaction is entered into, and at the time of 
any subsequent renewal or modification thereof that requires the 
consent of the INHAM, the terms of the transaction are at least as 
favorable to the plan as the terms generally available in arm's length 
transactions between unrelated parties;
    (e) The party in interest dealing with the plan: (1) is a party in 
interest with respect to the plan (including a fiduciary) solely by 
reason of providing services to the plan, or solely by reason of a 
relationship to a service provider described in section 3(14) (F), (G), 
(H), or (I) of ERISA; and (2) does not have discretionary authority or 
control with respect to the investment of the plan assets involved in 
the transaction and does not render investment advice (within the 
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
    (f) The party in interest dealing with the plan is neither the 
INHAM nor a person related to the INHAM (within the meaning of section 
IV(d));
    (g) The INHAM adopts written policies and procedures that are 
designed to assure compliance with the conditions of the exemption; and
    (h) An independent auditor, who has appropriate technical training 
or experience and proficiency with ERISA's fiduciary responsibility 
provisions and so represents in writing, conducts an exemption audit 
(as defined in section IV(f)) on an annual basis. Following completion 
of the exemption audit, the auditor shall issue a written report to the 
plan presenting its specific findings regarding the level of compliance 
with the policies and procedure adopted by the INHAM in accordance with 
section I(g).

Part II--Specific Exemptions

    Effective April 10, 1996, the restrictions of sections 406(a), 
406(b)(1), 406(b)(2) and 407(a) of the Act and the taxes imposed by 
section 4975 (a) and (b) of the Code, by reason of Code section 
4975(c)(1) (A) through (E), shall not apply to:
    (a) The leasing of office or commercial space owned by a plan 
managed by an INHAM to an employer any of whose employees are covered 
by the plan or an affiliate of such an employer (as defined in section 
407(d)(7) of the Act), if--

[[Page 15982]]

    (1) The plan acquires the office or commercial space subject to an 
existing lease with an employer, or its affiliate as a result of 
foreclosure on a mortgage or deed of trust;
    (2) The INHAM makes the decision on behalf of the plan to foreclose 
on the mortgage or deed of trust as part of the exercise of its 
discretionary authority;
    (3) The exemption provided for transactions engaged in with a plan 
pursuant to section II(a) is effective until the later of the 
expiration of the lease term or any renewal thereof which does not 
require the consent of the plan lessor;
    (4) The amount of space covered by the lease does not exceed 
fifteen (15) percent of the rentable space of the office building or 
the commercial center; and
    (5) The requirements of sections I(c), I(g) and I(h) are satisfied 
with respect to the transaction.
    (b) The leasing of residential space by a plan to a party in 
interest if--
    (1) The party in interest leasing space from the plan is an 
employee of an employer any of whose employees are covered by the plan 
or an employee of an affiliate of such employer (as defined in section 
407(d)(7) of the Act);
    (2) The employee who is leasing space does not have any 
discretionary authority or control with respect to the investment of 
the assets involved in the lease transaction and does not render 
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with 
respect to those assets;
    (3) The employee who is leasing space is not an officer, director, 
or a 10% or more shareholder of the employer or an affiliate of such 
employer;
    (4) At the time the transaction is entered into, and at the time of 
any subsequent renewal or modification thereof that requires the 
consent of the INHAM, the terms of the transaction are not less 
favorable to the plan than the terms afforded by the plan to other, 
unrelated lessees in comparable arm's length transactions;
    (5) The amount of space covered by the lease does not exceed five 
percent (5%) of the rentable space of the apartment building or multi-
unit residential subdivision [townhouses or garden apartments], and the 
aggregate amount of space leased to all employees of the employer or an 
affiliate of such employer does not exceed ten percent (10%) of such 
rentable space; and
    (6) The requirements of sections I(a), I(c), I(d), I(g) and I(h) 
are satisfied with respect to the transaction.

Part III--Places of Public Accommodation

    Effective April 10, 1996, the restrictions of sections 406(a)(1) 
(A) through (D) and 406(b) (1) and (2) of ERISA and the taxes imposed 
by Code section 4975 (a) and (b), by reason of Code section 4975(c)(1) 
(A) through (E), shall not apply to the furnishing of services and 
facilities (and goods incidental thereto) by a place of public 
accommodation owned by a plan and managed by an INHAM to a party in 
interest with respect to the plan, if the services and facilities (and 
incidental goods) are furnished on a comparable basis to the general 
public.

Part IV--Definitions

    For the purposes of this exemption:
    (a) The term ``in-house asset manager'' or ``INHAM'' means an 
organization which is--
    (1) either (A) a direct or indirect wholly-owned subsidiary of an 
employer, or a direct or indirect wholly-owned subsidiary of a parent 
organization of such an employer, or (B) a membership nonprofit 
corporation a majority of whose members are officers or directors of 
such an employer or parent organization; and
    (2) an investment adviser registered under the Investment Advisers 
Act of 1940 that, as of the last day of its most recent fiscal year, 
has under its management and control total assets attributable to plans 
maintained by affiliates of the INHAM (as defined in section IV(b)) in 
excess of $50 million; provided that if it has no prior fiscal year as 
a separate legal entity as a result of it constituting a division or 
group within the employer's organizational structure, then this 
requirement will be deemed met as of the date during its initial fiscal 
year as a separate legal entity that responsibility for the management 
of such assets in excess of $50 million was transferred to it from the 
employer.
    In addition, plans maintained by affiliates of the INHAM and/or the 
INHAM, must have, as of the last day of each plan's reporting year, 
aggregate assets of at least $250 million.
    (b) For purposes of sections IV(a) and IV(h), an ``affiliate'' of 
an INHAM means a member of either (1) a controlled group of 
corporations (as defined in section 414(b) of the Code) of which the 
INHAM is a member, or (2) a group of trades or businesses under common 
control (as defined in section 414(c) of the Code) of which the INHAM 
is a member; provided that ``50 percent'' shall be substituted for ``80 
percent'' wherever ``80 percent'' appears in section 414(b) or 414(c) 
or the rules thereunder.
    (c) The term ``party in interest'' means a person described in Act 
section 3(14) and includes a ``disqualified person'' as defined in Code 
section 4975(e)(2).
    (d) An INHAM is ``related'' to a party in interest for purposes of 
section I(f) of this exemption if the party in interest (or a person 
controlling, or controlled by, the party in interest) owns a five 
percent or more interest in the INHAM or if the INHAM (or a person 
controlling, or controlled by, the INHAM) owns a five percent or more 
interest in the party in interest. For purposes of this definition:
    (1) The term ``interest'' means with respect to ownership of an 
entity--
    (A) The combined voting power of all classes of stock entitled to 
vote or the total value of the shares of all classes of stock of the 
entity if the entity is a corporation.
    (B) The capital interest or the profits interest of the entity if 
the entity is a partnership, or
    (C) The beneficial interest of the entity if the entity is a trust 
or unincorporated enterprise;
    (2) A person is considered to own an interest held in any capacity 
if the person has or shares the authority--
    (A) To exercise any voting rights or to direct some other person to 
exercise the voting rights relating to such interest, or
    (B) To dispose or to direct the disposition of such interest; and
    (3) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (e) For purposes of this exemption, the time as of which any 
transaction occurs is the date upon which the transaction is entered 
into. In addition, in the case of a transaction that is continuing, the 
transaction shall be deemed to occur until it is terminated. If any 
transaction is entered into on or after April 10, 1996, or any renewal 
that requires the consent of the INHAM occurs on or after April 10, 
1996, and the requirements of this exemption are satisfied at the time 
the transaction is entered into or renewed, respectively, the 
requirements will continue to be satisfied thereafter with respect to 
the transaction. Nothing in this paragraph shall be construed as 
exempting a transaction entered into by a plan which becomes a 
transaction described in section 406 of the Act or section 4975 of the 
Code while the transaction is continuing, unless the conditions of the 
exemption were met either at the time the transaction was entered into 
or at the time the transaction would have

[[Page 15983]]
become prohibited but for this exemption. In determining compliance 
with the conditions of the exemption at the time that the transaction 
was entered into for purposes of the preceding sentence, section I(e) 
will be deemed satisfied if the transaction was entered into between a 
plan and a person who was not then a party in interest.
    (f) Exemption Audit. An ``exemption audit'' of a plan must consist 
of the following:
    (1) A review of the written policies and procedures adopted by the 
INHAM pursuant to section I(g) for consistency with each of the 
objective requirements of this exemption (as described in section 
IV(g)).
    (2) A test of a representative sample of the plan's transactions in 
order to make findings regarding whether the INHAM is in compliance 
with (i) the written policies and procedures adopted by the INHAM 
pursuant to section I(g) of the exemption and (ii) the objective 
requirements of the exemption.
    (3) A determination as to whether the INHAM has satisfied the 
definition of an INHAM under the exemption; and
    (4) Issuance of a written report describing the steps performed by 
the auditor during the course of its review and the auditor's findings.
    (g) For purposes of section IV(f), the written policies and 
procedures must describe the following objective requirements of the 
exemption and the steps adopted by the INHAM to assure compliance with 
each of these requirements:
    (1) The definition of an INHAM in section IV(a).
    (2) The requirements of Part I and section I(a) regarding the 
discretionary authority or control of the INHAM with respect to the 
plan assets involved in the transaction, in negotiating the terms of 
the transaction, and with regard to the decision on behalf of the plan 
to enter into the transaction.
    (3) That any procedure for approval or veto of the transaction 
meets the requirements of section I(a).
    (4) For a transaction described in Part I:
    (A) that the transaction is not entered into with any person who is 
excluded from relief under section I(e)(1), section I(e)(2), to the 
extent such person has discretionary authority or control over the plan 
assets involved in the transaction, or section I(f), and
    (B) that the transaction is not described in any of the class 
exemptions listed in section I(b).
    (5) For a transaction described in Part II:
    (A) If the transaction is described in section II(a),
    (i) that the transaction is with a party described in section 
II(a);
    (ii) that the transaction occurs under the circumstances described 
in section II(a) (1) and (2);
    (iii) that the transaction does not extend beyond the period of 
time described in section II(a)(3); and
    (iv) that the percentage test in section II(a)(4) has been 
satisfied or
    (B) If the transaction is described in section II(b),
    (i) that the transaction is with a party described in sections 
II(b)(1);
    (ii) that the transaction is not entered into with any person 
excluded from relief under section II(b)(2) to the extent such person 
has discretionary authority or control over the plan assets involved in 
the lease transaction or section II(b)(3); and
    (iii) that the percentage test in section II(b)(5) has been 
satisfied.
    (h) The term ``plan'' means a plan maintained by the INHAM or an 
affiliate of the INHAM.

    Signed at Washington, DC, 4th day of April 1996.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor.
[FR Doc. 96-8841 Filed 4-9-96; 8:45 am]
BILLING CODE 4510-29-P